Opinion | Markets aren’t really recovering from the US-China trade war – this is just a dead cat bounce

The change in the Fed’s policy posture has more bearing on global financial health than a resolution to the trade war

Either way, China and the US have worrying debt problems, and Chinese consumers won’t be able to boost the economy

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Published: 4:00am, 5 Mar 2019Updated: 5:04am, 5 Mar 2019

The markets are celebrating the pending agreement between China and the United States to end the trade war. This follows the US Federal Reserve signalling a pause in raising interest rates.

The euphoria is bringing the bulls out of hiding. Unfortunately, this is likely to be a dead cat bounce. A global slowdown is in full swing and with it, an earnings recession. Even if another major financial crisis could be averted, the debt binge of the past decade would take a long time to digest.

The change in the Fed’s policy posture is probably more important than a resolution to the trade war. Trump was raging that increased interest rates had crashed the market, and the falling market threatened to trigger another debt crisis.

The Fed backed down on plans to continue raising rates and unwinding quantitative easing. Its stated rationale for its changed stance is the slowdown overseas, which sounds like an excuse. In truth, its policy is self-contradictory.

If the bubble continues, another financial crisis, though delayed, is inevitable. If the aim is to achieve a soft landing – an orderly unwinding – it means having to resume raising interest rates when the market is stable in the second half of the year. And the market might crash again.

In China, there are domestic causes for the bear market. The trade war had an impact on sentiment and might have accelerated the market adjustment. The stock market bubble popped in 2015, and the market has not fully adjusted.